Finding Spin In The Financial Services Industry

The term "spin", in the sense used here, refers to the deliberate distortion of facts, circumstances or various forms of communication in order to sell an investment (sales spin), or in order to contest allegations of bad advice, mismanagement, negligence and so on (defensive spin). Sadly, such spin is common in the financial services industry.

A Closer Look As the name suggests, spinning means twisting and turning something around, giving it an angle or a slant. The objective is to present the issue in a certain way that is not really true, but generally stops short of an outright lie. In some respects, such partial-truths are more dangerous than outright lies, because they are often more difficult to detect, and people who are naïve or trusting are particularly vulnerable.

The impact of spin in the financial services industry can be devastating, because it can result in people parting – forever – with large sums of money. Since time immemorial, people have made investments because they only partly understood their true nature, namely the good part. And the reason for this partial understanding is that the seller knew that if he told the whole truth, he would not make the sale. After the losses are there, there is often a second round of spin as the seller tries to evade responsibility and liability for his advice and actions. (See Let Your Intuition Guide Your Investments for more.)

Let's take a look at these two main forms of spin.

Sales Spin This refers to providing people only with information that will get them to buy. This generally entails a mixture of total omission and presenting the remainder in an unjustifiably attractive and positive light.

Here are some examples. In order to create the impression that an investment is actively and competently managed: "Our outstanding team of experts is constantly on the lookout for companies that promise to deliver." The unspun version may well be: "Our sales team pushes whatever delivers the most money - to us."

In a similar vein, "our vigilant market monitoring keeps us abreast with all new developments, enabling us to move rapidly and optimize the portfolio." This may and often does really mean, "Every now and then, we get rid of a stock or two and buy new ones, but basically, we track the index."

Analysts are, of course, notorious spinners. You may be (mis)informed that "this firm has a remarkably innovative concept that is set to rock the market." Unspun version: "This is a hair-brained scheme that could work, so let's rather put your money into it than mine."

And as for the dreaded "r" word: "This is the ideal vehicle for adventurous investors who are willing to accept a higher level of risk in order to reap the benefits of greater returns over time." Unspun: "This is a big gamble that could lose you a lot of money." Adventurous is often a euphemism for a high-risk product. So is aggressive. Don't be fooled by the macho overtones.

Defensive SpinThis is the sadly inevitable follow-up to the sales spin. Once the dud investment has gone wrong, the seller is likely to try his luck denying everything. Out come a variety of speciously spun allegations: "You were an experienced investor and knew the risks"; "our documentation spells out the risks perfectly clearly"; "one cannot time the market"; "we don't have a crystal ball"; "the track record of this fund is outstanding"; "you can afford to lose the money"; "everyone else lost money" and so on, ad nauseam.

But there are nastier and more insidious forms of spin. For instance, some firms and their lawyers try to evade liability for misselling by spinning (essentially falsifying) the asset allocation after the fact. By looking at the proportion of money in equities after a crash, they claim that less money was in the stock market than was really the case. Obviously, all that matters is how much of the investor's money went into the market in the first place. A drop in value, caused by a market crash, is irrelevant to the original misselling. I have even known a firm try to pass off such a disastrous drop in the value of equities as evidence of active management, of the portfolio being "managed within a range."

The Line Between Spin and Lies There is generally a big difference, although in some cases, only a hazy dividing line. The essence of investment spin is that there be an element of truth, but the message is packaged in such a way as to mislead and either entice (to buy) or attempt to evade (liability).

By contrast, lies are totally false. For example, a firm that promises a rate of return of 10% a year, knowing full well that it cannot deliver, is lying. Likewise, but less blatantly, claims that an all-equity portfolio is medium risk, because "we buy only blue chip stocks and watch the markets every day", is also a lie. (To learn more, read Understanding Dishonest Broker Tactics.)

In practice, spin extends across a spectrum from:

Simply being a bit too positive, in a way that is clearly just promotion, and is not really deceptive and misleading. There is no harm in praising people or investments, provided no one gets a false impression.

Various levels of truly deceptive statements and claims that do entice people to part with money, because they do not understand the nature of the asset accurately and adequately.

Spun and falsified to an extent that the process is borderline or actual fraud.

In the real world of investment, the spin associated with number 2 is the real and ever-present danger, 1 is innocuous and 3 is less common.

How to Counterspin Keep your wits about you in the first place and get sound, objective advice before you part with your money. The one "good" thing about spin, is that experts and the initiated can detect it in many cases, but certainly not all. Particularly complex investment products are by nature not transparent and brokers can be fooled too. Extra caution is needed here. But you can reasonably easily protect yourself against basic spin and classic misselling or unsuitable investments. However, there are many investors out there who get taken for a ride, and if the first ride is a disastrous one, they can be ruined financially. (To learn more, see Show And Tell: The Importance Of Transparency.)

If Spinning Affects YouIf you discover the potential disaster before it converts into real or paper losses, just get out fast - take the money and run. If the losses are already there, you may be in trouble. People who spun in the first place will spin again. If things went wrong legitimately, or at least someone in the firm is honest, you may be lucky and the matter will be treated fairly. If not, you will have to try mediation, ombudsmen or the courts. Especially the latter is an expensive option and not without its risks either. But it may be the only way to get justice.

ConclusionOne of the ugliest realities of the financial services industry is that, up front, people will spin to make a sale. If this leads to losses, the same people will spin again to evade liability. While such deception is as old as the hills, it is still around and always will be. As always, caution, knowledge, double-checking and second opinions are the best way to fend off the spinners. (For more, check out Is Your Broker Acting In Your Best Interest?)